Trader Vic – End of Decade Review: “Requiem of Free Market Capitalism”
Here is a little preview to the upcoming weekend show where Trader Vic joins me to wrap up the first hour. He sent me this article ahead of our call. After reading it I thought you all would enjoy. Stay tuned for the weekend show!
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End of Decade Review: “Requiem of Free Market Capitalism”
By Victor Sperandeo with the Curmudgeon
Disclaimer & Personal:
The opinions expressed herein are exclusively those of Victor Sperandeo. The Curmudgeon has distinctly different opinions on many of the political issues discussed in this article. Email him at email@example.com if you are interested in my opinions or wish to comment on any of my past posts.
The remainder of this largely historical article is by Victor, with edits, sub-heads, fact checking, gap fill-ins and many hyperlink references added by the Curmudgeon.
I have already written everything possible about the ultra-unbelievable disconnect between the stock markets and real economy. My next Curmudgeon post will be on the Fed changing the primary trend of the stock market (something Dow Theorists thought was impossible) and lurking economic dangers due to the Fed’s failure to execute its exit strategy to reduce its humungous balance sheet.
On a personal note, the Curmudgeon is recovering from his 3rd heart rhythm hospital procedure this year, with the second catheter ablation earlier this month so far successful in restoring an almost normal heart rhythm and resting heart rate (down from 140 to 162 with a highly irregular/saw tooth pattern for most of 2019).
The last 10 years (from 2009-2019) of extraordinary gains for the financial markets with the longest economic “recovery” of all time seems like the best possible outcome following the great recession of 2008-2009. Yet I believe it has sowed the seeds for a more severe financial crisis that could result in a depression or very high inflation for a prolonged period of time. However, the timing of such a scenario is highly uncertain. One cannot realistically predict when it might happen and what the actual severity will be.
In my humble opinion (IMHO), laissez-faire capitalism, or freedom in economics with private property rights, has been taken over by academics at the Federal Reserve Board who have put “Central Planning” ahead of Adam Smith’s “invisible hand” to rule the country and the people in America.
The last 11 years (starting from 2009) have culminated the move to the political far left for many U.S. institutions, with the virtual open breakdown, and trashing of the U.S. Constitution- the law of land.
Political Probes and Inquiries do not follow the “Rule of Law:”
Political events like the “Mueller Probe” and the recent impeachment of President Trump exemplify how Congress has not followed the “rule of law.” For example, the two articles of impeachment “charges” are nowhere stated in the U.S. Constitution as impeachable offenses, or the “Obstruction of Congress, and Abuse of Power.”
The Constitution says “a President can be impeached for “Treason, Bribery, or Other High Crimes, and Misdemeanors.” This phrase came from English Law and had a distinctive meaning. The Democratic party charges of impeachment have nothing to do with the Constitution. The goal was to overturn the 2016 election and prevent a re-election in 2020 all done politically using a kangaroo court.
Therefore, we can say that the “rule of law” has been discarded by the U.S. House of Representatives to meet, not only economic goals, but political ends.
The late, great American economist Allan H. Meltzer (who died in 2017) was Professor of Political Economy at Carnegie Mellon University’s Tepper School of Business. He studied, wrote and specialized in monetary policy and wrote many books on the subject of money). He is quoted in an interview at Real Vision TV as saying: “No country became rich without the RULE OF LAW, and no country has remained rich without the RULE OF LAW.” These were his immutable rules of the political economy that could never be broken. The rule of law has been reduced as an instrument of revenge, the trading of benefits, and the expression of popular notions and desires by politicians.
The History of How We Got Here: Fiat Money and the Progressive Income Tax:
Printing Fiat Money and High Progressive Income Taxes (starting in 1913) are the tools used to end Liberty and overturn Capitalism (See the Communist Manifesto and Vladimir Lenin “The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation”).
The beginning date of this long process can be estimated to be 1862 with passage of the “Legal Tender Act” and the taxes President Abraham Lincoln instituted to fund the Civil War (which were both later deemed unconstitutional). This paved the way for the Federal Reserve Act of 1913 and the 16th Amendment to the U.S. constitution which was signed by President Woodrow Wilson.
Next came FDR’s unconstitutional changes of his “New Deal,” especially the confiscation of gold from U.S. citizens via an executive order and thereby the negation of the gold standard. (Side Note: how could FDR change Article 1 section 8 of the Constitution alone? The Supreme Court would not hear the lawsuits!).
These three events set a time clock ticking that has brought us to today and the drastic decrease in our civil liberties along with government central planning which has destroyed free markets.
1. Historical Review of Fiat Paper Money:
Perhaps a review of some game changing details will prove the above points. Please skip to the next section if you’re not interested in this historical overview.
To finance the Civil War, the federal government in 1862 passed the Legal Tender Act, authorizing the creation of paper money not redeemable in gold or silver. About $430 million worth of “greenbacks” were put in circulation, and this money by law had to be accepted for all taxes, debts, and other obligations—even those contracted prior to the passage of the act.
In the Supreme Court cases known as the “Legal Tender Cases,” which involve paper money i.e. Greenbacks (issued from 1862-1865) which were deemed unconstitutional in Hepburn v Greswald in 1870 in a -5 to 3 -Supreme Court decision. Article 1 section 8 and 9 of the U.S. Constitution made only gold and silver money. That was because in about 100 years of experience with a printing press in the colonies starting in the 1600’s, it always ended with high inflation.
In February 1870, President Ulysses S. Grant changed a judge on the Supreme Court and nominated one more pro-fiat paper money judge. Justices Bradley and Strong were confirmed, and at the next session the court agreed to reconsider the greenback issue.
In 1871, Justice William Strong wrote the majority opinion in Knox vs. Lee case, which reversed the Hepburn decision of one year earlier. This time, the vote was 5–4, in favor of the act. Strong held that Congress had the authority to pass monetary acts such as the greenbacks law during a time of national emergency. (Supreme Court Decisions are NOT laws, but only OPINIONS of the case at hand).
Similarly, in the 1871 court decision of Parker vs. Davis, Justice Strong spoke for the majority, upholding the government’s power to enact legal-tender legislation and defending such power under the “necessary and proper” clause of the Constitution.
àThis effectively said that if not enough gold was available to back U.S. dollars (in this case due to the civil war) that under “certain conditions” the U.S. can print money!
Then in a more amazing 1884 decision (the case of Juilliard v Greenman), the Supreme Court voted 8 to 1 that the U.S. can print money for “any reason” – not only for emergencies. Under this decision/opinion one should ask why we have a Federal Reserve as the Treasury can print money(?) – without interest – in lieu of issuing debt with interest that Bankers buy with printed fiat money?
The “independent” non-government banking cartel is camouflaged to look more innocuous. The Fed reports to Congress, but it answers to its owners: see Rockefeller, Morgan, and Rothschild families etc. who are the secret owners of the FED.)
The only dissent in the 1884 Juilliard v Greenman case was from Judge Stephen J. Field’s, which foretold exactly what has happened today. He wrote in part:
“Why pay interest on the millions of dollars of bonds now due when Congress can in one day make (print) the money to pay the principal? And why should there be any restraint upon unlimited appropriations by the government for all imaginary schemes of public improvement, if the printing-press can furnish the money that is needed for them?”
2. History of the Progressive Income Tax and Government Spending:
On changing the income tax laws, the U.S. government sold the 16th amendment on the same basis as Obamacare was passed (“you can keep your doctor “and if you like your plan you can keep it”). It was straight out misleading rhetoric and lies for the vote.
In the original 1913 income tax plan the minimum was 1% with a $4,000-dollar exemption and a “maximum” top bracket of 7% for income over $500,000. Today, the “minimum” bracket is 10% and the top bracket is 37% not including State income taxes (e.g. add on CA’s top margin rate which is 12.3%). Less than 1% of the population paid any federal income tax in 1913, and at a rate of 1% in 1914. You would have to earn 0ver $100,696 using adjusted CPI inflation to pay any tax today. The tactics of government to take power over the people are not new!
Let me give the reader some rare facts:
In 1925 under President Calvin Coolidge, the maximum individual income tax rate was 25%. The maximum corporate tax rate was 13%. The U.S. government collected total Federal tax revenue $3,641,000,000 that year. Total government spending was $2,924,000,000, which created a surplus of $717,000,000 or 20%.
Flash forward to the present: In Fiscal year 2019 (which ended September 30th), revenues were $3,451,000,000,000 (Trillions), and total spending was $4,411 trillion with a deficit of $943 billion. Simple arithmetic reveals that 2019 tax revenue grew 94,681% from 1925, but spending grew 150,755% over the same time period (1925-2019)!
àTaxes grew at 94,000% yet the U.S. still had a stated deficit of almost ONE TRILLION DOLLARS! That’s a 7.5% compounded annual rate of tax increases, but an 8.1% increase in spending per year for 94 years!
What this CLEARLY DEMONSTRATES is that no matter how much taxes are collected, (corrupt) politicians will think of a new scheme to spend money on, and claim they need more taxes to pay for it.
Why? It is in their interest to get elected to spend/give money to special interests and people in exchange for campaign contributions, and their votes. This goes for spending and tax law benefits also.
Of course, giving away money is what gets pols elected. The number of registered lobbyists in Washington DC as of 2018 is 11,586. They are all hired by large corporations and large private companies (e.g. The Koch Brothers) to give campaign donations (i.e. bribes) for spending and tax breaks, which includes less regulations and lax immigration laws for lower wages.
This means that for every 28,482 people who get “no” representation, there is one corporation that gets “direct “representation because they pay for it?
Let’s look at a few examples. AT&T had gross revenue of $170.8 billion, and Alphabet/Google $136.8 billion in 2018. The total salaries of all of Congress in 2018 was less than $100 Million a year. Of AT&T’s gross revenue that is 0.00058% and 0.00073% for Google!
àGuess who controls Congress and thereby the laws? My 17-year-old granddaughter understands this 2+2 racket, but apparently voters don’t?
The Federal Reserve and the 16th Amendment:
What makes all this possible is “The Fed” and the 16th Amendment of the U.S. Constitution. The Federal Reserve Act of 1913 is totally unconstitutional and the tax system was passed on misrepresentations or a lie, which the State legislative politicians passed using the lie to hoodwink or dupe the people into thinking they would not have to pay anything.
You hear this said today for the Green New Deal and Universal single payer health insurance: “we are only going to tax the rich!”
The use of ENVY as a weapon goes back to the beginning of formal society. This always backfires as there are not enough” rich” people. The US government 2019 currently spends $12.7 billion a day, 365 days a year.
It is truly ironic that taxes are not needed to fund the government- when you have a printing press. This is not my thought, but that of one of the U.S. government’s or Bankers most powerful men in the 1940’s. A man who has an Ayn Rand character’s name: Beardsley Ruml, Chairman of the Federal Reserve bank of New York.
Mr. Ruml wrote an infamous expose’ of the real goal of taxes in an article called: “Taxes for Revenue Are Obsolete”- written in January 1946, published in “American Affairs.” He stated that the reason for taxes were for four purposes:
1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
2. To express public policy in the distribution of wealth and of income;
3. To express public policy in subsidizing or in penalizing various industries and economic groups;
4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.
#3. Is particular telling: TO BE USED AS A WEAPON OF ONES POLITICAL OPPONENTS, WHILE GIVING MONEY TO POLITICAL FRIENDS!
#1. SHOULD BE NOTED, AS IT BASICALLY SAYS, WE NEED TO TAX TO TAKE MONEY FROM THE PEOPLE SO THE SUPER RICH CAN ENJOY ASSET APPRECIATION WITHOUT THE FED RAISING INTEREST RATES AND CAUSING A DECLINE IN NET WORTH DUE TO INFLATION.
Comrade Beardsley should be remembered by everyone, as he was the architect of the “Victory Tax,” which is now called the Payroll Tax.
How to Measure Economic Success:
We use GDP to measure economic success, which heavily weights the earnings of approximately 5000 corporations. Why not measure economic success based on an increase of “Median Household Income” terms?
Adjusting Median Household Income for Inflation:
What are the effects of inflation created by the Fed on the middle-class income?
Median Household Income (before Taxes) in the US began being recorded by the Federal Government in 1967.
“Dave Manuel.com” adjusts this income for inflation and the results show the real annual compounded increase in median household income based on 127,590,000 tax returns (in 2018) to be +0.7% or 0.007 per year income growth. In bond interest terms, that is 70 basis points per year over 52 years.
àThe government is created by politicians to SERVE THE RICH AND ENSLAVE THE POOR. Nothing demonstrates that more than this statistic:
1967 inflation adjusted income pretax was $44,284 and in 2018 $63,515. this is called” ENSLAVING THE POOR,” or more accurately making the middle class into SERFS.
Tax Increases, the Fed’s Balance Sheet, and the S&P 500 during President Obama:
In the eight years of the Obama Presidency (2009-2016) taxes were increased (note the end of the Bush Tax cuts in 2012, and the 2010 changes to the tax code due to ACA/Obamacare). Conversely, the Fed held interest rates to zero (aka ZIRP) from 12/31/08 until 12/16/15 with a 25 bps increase and then a second increase of 25 bps in December of 2016.
That was largely responsible for the S&P 500 stock index to compound at 14.5% per year during Obama’s term as President.
Note from 1926-2008 the S&P compounded at 9.62%. However, with the Fed’s ZIRP, it increased historic returns by 50.7% compounded.
In formulaic words: very slow GDP growth, zero fed funds rates, added to a 5x’s increase in the Fed’s Balance sheet [from $870 billion in August 2007 to $4.5 trillion in early 2015]. That ballooned Fed balance sheet was due to three rounds of Quantitative Easing (QE’s) plus a dash of Operation Twist (swapping short term duration debt for long term debt).
Yet the Fed has a mandate to not create inflation, which would cause them to raise rates if inflation was above their target range of 2%. Inflation was lower than that target rate, largely due to changes in the way inflation is calculated. The Fed also paid banks NOT to make loans via paying banks interest on reserves. That is the money created by rounds of QE showed up as excess bank reserves which the banks deposited at the Fed to earn risk free interest, rather than make loans which would stimulate the real economy. This is called “SERVING THE RICH.”
Inflation Rate Calculations:
At the beginning of the Reagan presidency the CPI was changed from a “Cost of Goods” index to a Cost of LIVING INDEX. It has evolved to what it is today using smoke and mirrors tactics.
To get a better understanding of the real inflation math see” The Chapman Index “which measures 500 products from Airlines Tickets to Zoo Admissions from 50 individual major US cities. For example, New York City’s last 5-year average was an inflation rate was 11.4% a year, while Dallas was 8.9%. The lowest was Mesa Arizona at 6.6% and the high (virtually double) was San Jose CA at 13%.
The Bureau of Labor statistics however shows 10-year rolling (CPI) inflation for the US ending in 1979 7.37%,1989 5.09%,1999 2.93% ,2009 2.53%, and in 2019 1.80% as of November. The calendar lowest 10-year CPI inflation rate ended 2017 was 1.62%, and the high was 1973-1982 8.67%. For those intellectuals who may ask what would history show for the 1970’s if inflation was calculated the same as today?
REAL GDP would be 7.18% compounded from 1/2/70 -12/31/81. WHILE NOMINAL GDP WAS 10.04% AND INFLATION 2.86% IN 2012 DOLLARS USING TODAY’S INFLATION CALCULATION.
Of course, using the inflation math of the 1970’s from 2009 would have created a great depression of negative GDP! So we see that the way one calculates inflation can produce a “night and day” type of outcome.
Longest Economic Expansion in U.S. History- Really?
This brings us to another record change from the interest rate and printing money policy of the last 11 years: the record length of the current U.S. economic “recovery” (which many don’t believe is a real recovery that has spread to the masses).
From 1854 to 2008 the average length of a U.S. economic recovery was 38.7 months. From June 2009 to January 2020 it will be 127 months long! That is 3.3 times the average for 155 years!
Yet this current economic expansion corresponds to the worst U.S. recovery since 1776! GDP grew at mere nominal rate of 3.8% and a government inflation GDP adjusted rate (using 2012 dollars) of 2.21%.
To view the Fed policy changes longer term, we begin in the 1980’s “Greenspan Put” era, where the average length is 103 months from 1982. However, this formula “Served the Rich” well as it created fantastic gains for Stocks, Bonds, and Real Estate to name the assets of choice for Wall Street rulers. Compare those huge asset gains to Median Household Income rose a measly 1.4% pretax, from 2008 to 2018.
Sidebar: Share prices much more important than economic growth for execs:
From a NY Times article titled Short-Term Thinking Is Poisoning American Business Free-market capitalism won’t survive unless it makes structural changes toward long-term investing:
A 2006 study conducted by economists at Duke University found that 78 percent of executives at public companies said that they would sacrifice long-term economic value for a short-term lift in share price.
A Close Examination of U.S. political corruption:
It seems to me that the war between the rulers and serfs are being won without any real outcry by the people. Why not? Let’s take a closer (no holds barred) look at what’s really going on:
“The Art of War” book states:
“The supreme art of war is to subdue the enemy without fighting.” – Sun Tzu. And that’s exactly what has happened in the U.S.
The reality is that the (private sector) rulers buy the (public sector) lawmakers, while the so called judges are controlled by the Globalist Main Stream Media/Press via their commentaries and opinions that scare many of these Judges, e.g. Chief Supreme Court Justice John Roberts.
Did you know that the Main Stream Media (MSM) are almost totally controlled by six corporations [1.]?
Note 1. Fox, Disney, CBS, AT&T (which owns CNN and all of Time Warner Media), Comcast (which owns NBC), and Viacom control 90% of the media today. Contrast that to 1983 when at least 50 companies controlled 90% of the media.
And three CEO’s are members of the Council of Foreign Relations (CFR) created by David Rockefeller, who called himself “a citizen of the world.”
Rockefeller’s famous quote says it all:
“Some even believe we (the Rockefeller family) are part of a secret cabal working against the best interests of the United States, characterizing my family and me as ‘internationalists’ and of conspiring with others around the world to build a more integrated global political and economic structure – one world, if you will. If that’s the charge, I stand guilty, and I am proud of it.” David Rockefeller
The last decade was the culmination of the history of U.S. unconstitutional law changes, which were not challenged. The move towards Socialism politically, Central Planning monetarily, the Mainstream Media selling of “influence” (AKA propaganda instead of factual news), and the virtual end of the “rule of law” is the obituary of the Constitution in the last 10 years.
This collective totalitarian like rule mentality is 180 degrees of what the U.S. was founded on. No better quote to show the contrast than the last paragraph of the U.S. Declaration of Independence:
“We, therefore, the Representatives of the United States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of these Colonies, solemnly publish and declare, That these United Colonies are, and of Right ought to be Free and Independent States; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.”
I believe the above excerpt will be most relevant for the decade of change in the near future that will lead to an endgame for the political system we now have.
Please try to name one current person in Congress of the 535 elected members who ever stated the above principles taken as a whole? None ever mentions the concept of LIBERTY, which is what the Constitution was created to protect.
Try to name three things you can do without government permission? It’s not easy.
Happy New Year, good luck and till next time……………………
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he’s owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm’s research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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